Radio gaga – APN success story

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In 1933, President Franklin D Roosevelt used the radio to great effect to explain his policy and decisions on a number of important issues.

The radio industry has certainly changed since then, but remains a viable niche media market with an important role in the music industry.

Last week, the industry itself became the news regarding two deals – one that worked and the other that clearly didn’t.

The one that worked

APN News & Media (APN) finally had a chart topper with its acquisition of the other half of its radio joint venture across Australia and New Zealand for $246.5 million. APN raised $132 million from retail and institutional shareholders for the purchase and barely batted an eyelid in doing so.

APN’s share price has happily lurched out of its fox hole and the company’s prospects suddenly seem a whole lot brighter.

It now owns ARN and TRN. ARN, the Australian Radio Network, has a market share of 27%. That puts it ahead of Fairfax Media’s 13%, level with DMG Radio but behind audience leader Austereo (part of Southern Cross Media Group) at 34%.

The Radio Network (TRN) dominates New Zealand radio in talkback, music and sports categories and virtually splits audience share with the other main competitor.

The company now sees radio, outdoor and digital as its growth assets, noticeably excluding the substantial newspaper business still within its portfolio of assets (or perhaps newspapers are a liability these days?)

APN will now fully own 12 radio stations across the major metropolitan cities of Australia with brands such as KIIS 1065 in Sydney with the newly poached breakfast duo of Kyle and Jackie O. Let’s hope APN knows what it has got itself into in that respect.

Now that APN owns 100% of the NZ and Australian radio joint venture, it can consolidate the assets and the cash flow, which creates a substantially strengthened group business. The additional cash flow will be used to reduce group debt.

Radio will now contribute 42% of group operating earnings, up from 26% prior to the acquisition.

The one that didn’t

Contrast that deal with the shambles going on between John Singleton’s Macquarie Radio and Fairfax regarding the extended talks about merging their respective radio businesses.

It seems relations between John Singleton and Fairfax Media have turned a little X-rated, with Mr Singleton using crass language to describe the state of discussions between Macquarie and Fairfax.

Fairfax acquired its radio assets for $350 million back in mid-2007 for a 14 times multiple of the radio earnings of just $25 million in FY07. In comparison, APN is acquiring the joint venture radio assets for a 6.9 times multiple of operating earnings.

Fairfax had ideas that the radio business would diversify its earnings away from the metropolitan newspaper business it owns, but has since changed its mind on the benefits of owning radio assets and has been actively trying to sell the assets since 2011.

Fairfax’s radio assets include Sydney talkback station 2UE, that has been unprofitable for several years and shows no sign of recuperation. It does own, however, the lucrative 3AW station in Melbourne, which remains undisturbed as the number one talkback station in that market.

The metropolitan radio industry in Australia generates around $700 million a year and has grown at an average annual rate of 3.7% for the last decade. Regional radio adds another $300 million in revenue so that the total radio industry represents approximately 8% of total advertising expenditure in Australia.

Although that number now pales in comparison with the almost $4 billion spent in online advertising last year, it still generates reasonably attractive returns. It can also punch above its weight in terms of political clout and public awareness, thanks to its often boisterous and cantankerous shock-jocks with outsized personalities and opinions.

APN’s radio transaction has certainly changed its complexion and outlook for the better, but it seems Fairfax remains lumbered with an asset it doesn’t know how to run or even sell. Maybe that is a reflection of its management rather than the assets themselves.

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